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Ricardo Hausmann, a former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank, is Director of the Center for International Development at Harvard University and a professor of economics at the Harvard Kennedy School.

One more variable that is generally disregarded is that of power. Know-how or `Truth' - what is true - has two components: One is scientific knowledge that generates technology and lead to more efficient outcomes. But it is not only what is most useful is most rewarded. Facebook, for example has no productive value. The other is sheer power which establishes truth to the exclusion of all other alternative ideologies. The returns on the latter section of the know-how can perhaps explain the differences mentioned in the article.

It looks that in your production function, there are essentially 3 factors, namely, capital, labour and know-how. So, it is not difficult to erroneously conclude as Picketty, if we do as he does; comparing economic growth with the rate of return of capital, at the same time as considering that the rate of return from capital means exactly the same as the return from financial assts. Putting intergenerationally, as Picketty did, assuming that inherited wealth create more wealth, but, "unequally", which is at any event a false assumption made by Picketty.

Um, I thought that Piketty has argued, and some of his associates put into a paper (rats! I can't find the URL), that the balance of payments for developed countries has been greatly over-estimated because the 'dark money' out there (your term) is money that e.g. wealthy Americans have invested abroad, that is unaccounted for as hidden for tax purposes, suggesting that the gap in capital income is not a matter of 'knowhow', but of even worse inequality than is obvious.

Your 'super-managers' argument also seems very weak to me. Inequality is worse in large part because the average CEO is paid way more than before. Indeed, the median CEO pay has been growing faster than the average over the last 20 years, meaning that the average (or worse) CEOs have been gaining faster than your 'super-managers'.

And the highest incomes of the last decade or so have gone to hedge-fund managers, who add little if anything to the world economy, and have recently as often flamed out as provide benefit to anyone.

According to the latest revision of SNA, R&D will now be counted as investment, so knowhow to some extent will be explictly incorporated into the definition of "capital" in national accounts. And Tobin's q also reflects knowhow in equity valuations.

But whether the supersized incomes of "supermanagers" really reflect their contributions to "knowhow" or an abuse of managerial capitalism and the robber baron role of finance can be debated.

For about a decade now, the BRIC countries have been investing abroad, not just in stocks and bonds, but in making economic investment -Foreign Direct Investment- leading to Development in Latin America, For instance. China has invested significantly in this manner in countries such as Argentina and Peru, to name two. This trend may pick up, and regardless of the current know how and IP advantage currently enjoyed by developed countries such as the U.S. over the likes of China, for instance, developing countries are also accumulating their own stock of this complement to traditional capital and labor and will derive their own above-domestic returns through FDI. In my perception, FDI, whether by the U.S. or the BRICS, or any country, is a form or returns arbitrage leading in the very long term to basically equal risk capital returns and equilibrium.

I'm not sure I'd say they are worth $1 trillion, but the market consensus is that they will generate $1 trillion worth of profits for shareholders. Whether these profits are linked to $1 trillion in net social gains is another story altogether.

I am confused by this article. If it is knowhow that made the difference, why so-called "foreign direct investment" is made at their home country? Isn't the low labor costs and no environmental pollution costs that made foreign direct investment more profitable, as Larry Summers once said?

As for market cap of Apple, Google, and Facebook and the like, if we follow the author's logic, the bigger the stock market bubble, the more knowhow these companies have?

if we follow the author's logic, the bigger the stock market bubble, the more knowhow these companies have?

Syllogistic fallacy there Jeff. Just because APPL, FB & GOOG produced bubble-sized profits due to the combination of knowhow, capital and labor, doesn’t mean that every bubble contains those factors. Hausmann isnt trying to explain bubbles, just to detect exceptions to Piketty's theory. Erroneously as Ken Presting explains in the post below.

I'm relatively illiterate economically, but I'd add a couple of other flaws in Hausmann's argument:
1) The premium the US has earned (capital rent not paid) over the 1983-2013 period may reflect its currency of last resort status - I guess - but correct me if I'm wrong.
2) The knowhow of the supermanagers is not in deploying enterprise capital, but in deploying the intellectual capital Presting referred to. At the senior executive level this capital often consists in 'who you know' and how good you are at the marketing and politicking of your own reputation rather than enhancing capital returns.

Prof. Hausmann here joins a growing crowd of potentially helpful experts who could, if they tried, add light to the noise surrounding Piketty's work. Unfortunately he is adding to the confusion.

It is simply irrelevant to observe that interest rates on US debt is very low nowadays, since Piketty's argument refers to a long-term average, over almost two centuries. Hausmann's argument here is as weak as those who deny climate change based on a chilly afternoon.

It's more a shame that he couldn't explain for readers less well versed in economics that "knowhow," like every form of intellectual property, is included in economic theory as a capital investment. Individual workers who obtain experience or education have spent personal capital (or time) to gain that value. When they subsequently sell their labor for wages above market rates, they are profiting from "rent" because as a commodity, their time is scarce. Piketty's basic argument is *strengthened* by noticing the special nature of knowhow, but his statistics include that phenomenon as a natural consequence of the abstract concept of capital.

I don't blame Hausmann for putting this worthless column on the site. I blame the editors who prefer a big name on the by-line over sincere thought in the article.

P-S has a brilliant and indispensable concept, but you have to turn down bad submissions if you're going to post quality content. I love this site, but please, let's all pitch in to improve.